Taking The Lid Off Least Square Monte Carlo

Least Square Monte Carlo (LSMC) is gaining attention as a tool for fast asset and liability revaluations. Solvency II and the move to Economic Capital methods for insurers has meant that the computation power needed to run a large number of stochastic stress scenarios to value the capital of the insurer has become a road-block for many firms. Many in the industry have developed alternative and robust approximation methods for the value of the insurers' capital without having to run the full set of scenarios. These approximation techniques are called proxy models.

In order to estimate the companies Solvency Capital Requirement (SCR) there are multiple proxy models available with their respective advantages and disadvantages. One such method which has gained a lot of traction recently is Least Squares Monte Carlo (LSMC). LSMC, whilst complex and not immediately intuitive, it is a powerful tool which significantly reduces the number of full model runs required and has